A Stakeholder-Legitimacy Framework for ESG Disclosure in Banking Under Evolving Regulatory Mandates

Literature Review of ESG disclosure in Banking Industry

Veronica Zhang

2025-02-26

Introduction

  • Global Shift to Mandatory ESG Frameworks
  • Disclosure frameworks consensus

Motivation

  • Systemic Risks of Nature-Related Financial Exposures
  • Critical Research Gaps in Banking ESG Studies

Findings

  • Proposed a stakeholder-legitimacy framework in banking industry
  • Research gaps:
    • Ownership dynamics: The role of institutional and state ownership in shaping ESG outcomes remains inconsistent across studies
    • Regulatory Efficacy: Analyses of the impact of mandatory frameworks on bank risk profiles and governance mechanisms are still scarce.
    • Systemic Risk Implications: The interplay between ESG disclosures and systemic financial stability, especially during regulatory shocks lacks empirical rigor.

Contribution

  • Stakeholder-Legitimacy Framework for Banks
  • Policy-Relevant Insights & Future Research Agenda

The review of ESG disclosure frameworks

Global Frameworks

  • TNFD (Task Force on Nature-Related Financial Disclosures)
    • Extends TCFD’s pillars to biodiversity, water security, and ecosystems
    • LEAP Methodology: Locate, Evaluate, Assess, Prepare
    • Adopted in France, Brazil, and the UK.
  • ISSB Standards (IFRS S1 & S2)
    • Integrates sustainability into financial statements
    • Mandatory adoption by 2025 (e.g., UK SRS, Singapore)
  • Alignment of IFRS S1 and S2

Regional Frameworks

Table 1: Regional ESG Disclosure Regulations
Region Regulation Year Key_features Scope Enforcement Alignment
EU EU Taxonomy Regulation 2020 a comprehensiver classification system designed to identify environmentally sustainable activities Banks and in-scope entities Failure to comply can result in reputational damage and exclusion from sustainable finance markets EU Taxonomy classification system
EU Corporate Sustainability Reporting Directive (CSRD) 2023 'double materiality' approach; ESRS 50,000+ EU/non-EU companies by 2027 Mandatory for EU/non-EU companies Aligns with IFRS S1 and S2 standards; TNFD metrics
EU Sustainable Finance Disclosure Regulation (SFDR) 2021 financial institutions classify investment products based on their sustainability objectives Financial institutions Market exclusion for non-compliance Links to EU Taxonomy
UK Sustainability Disclosure Requirements (SDR) 2023 ISSB-aligned reporting; Transition plans for Paris and GBF; Financed emissions disclosure Listed companies (from 2026); High-impact sectors (agriculture, mining) FCA enforcement starting 2026 Aligns with IFRS S1 and S2; References TNFD recommendations
US SEC Climate Disclosure Rule 2024 Material climate risk disclosure; Scope 1-3 emissions reporting; Extreme weather cost reporting Public companies Delayed due to legal challenges N/A
US Climate Corporate Data Accountability Act (SB 253) 2026 Scope 1-3 emissions reporting for $1B+ revenue firms; Biodiversity risk assessment Large corporations operating in California California state law enforcement Addresses supply chain biodiversity risks

Theoretical Foundations

  • Organizational Theories
  • Stakeholder theory
  • Legitimacy theory
  • Economic Theories
    • Agency theory
    • Information Asymmetry
  • Institutional Isomorphism Framework
    • Coercive, mimetic, normative
  • Emerging Theoretical Concepts
    • Natural capital concept
    • Double-materiality

Empirical Research in Banking Industry

  • Firm value and Performance
  • Bank risk
  • Investment strategy and portfolio alignment

Stakeholder-Legitimacy Framework

Proposed Framework

Figure 1: ESG Disclosure Flowchart

Stakeholder-Legitimacy Framework

Moderating Factors

  • Bank Size
  • Financial Performance
  • Ownership Structure
    • Publicly listed
    • Institutional shareholding
    • State-owned
    • Shareholding concentration
  • Regulation

Conclusion

  • Mandatory ESG Frameworks (TNFD, ISSB, CSRD) drive systemic integration of nature-related risks into banking.
  • Stakeholder-Legitimacy Framework
    • Synthesizes stakeholder theory, legitimacy theory, institutional isomorphism
    • Moderators: economic context (size, financial performance), ownership structures, regulatory regimes
  • Future Research Priorities
    • Drivers of Disclosure Quality: Economic vs. institutional factors.
    • Systemic Risk: Impact of nature-related regulatory shocks.
    • Institutional Pressures: Coercive, mimetic, normative forces in ESG adoption.